Australian Government Productivity Commission
Submission to the Competition Policy Review
Published June 2014
Key points
2

Competition is not an end in itself but plays a crucial role in promoting economic
efficiency and enhancing community welfare. Competition:
– gives consumers choice
– provides firms with greater incentives to innovate to reduce their costs, as well as
to increase their revenues by better meeting the preferences of their customers
– helps society to generate the greatest value from its scarce resources, and in so
doing, to generate higher real household incomes and living standards.

There is scope to undertake further policy reform that can increase competition in the
economy and deliver net benefits to the Australian community.
– Some sectors of the economy remain relatively untouched by competitive
pressures, with firms in those sectors offered protection from competition by
government regulation.
– Applying further reforms to some government-owned businesses could produce
efficiency gains.
– Digital-based competition is an emerging presence in many markets. Competition
policy should accommodate all new sources of competition, and be sufficiently
flexible to accommodate alternative models of service and product delivery.

Governments should undertake assessment processes to determine priority areas
for competition policy reform, and to assess the costs and benefits of policy options.
– Governments have many policy options available to them to increase the scope
and benefits of competition, including the use of market-based instruments and
the removal of regulatory impediments. The policy option chosen should be
informed by thorough analysis.
– Opening markets to more competition has proven in many cases to produce
efficiency gains — but caution needs to be exercised in some markets. Potential
market failures and non-efficiency objectives, such as the promotion of equity,
mean that simply promoting competition may not always be desirable.
– Additional measures can help mitigate market failures or address equity concerns
associated with competition reform. However, additional measures have costs
that will affect the overall net benefits of introducing more competition.
– It remains appropriate to require advocates of restrictions to competition to
demonstrate net community benefit from those restrictions, as was the case under
the original National Competition Policy reform process.

In the human services sector, the characteristics of the relevant markets, the
complexity of arrangements for funding and delivering services, and the need to
consider equity objectives, mean that policy options need to be properly structured to
deliver the desired outcomes. The policy options may include: opening the sector to
further competition; the use of market-based instruments that capture some of the
benefits of competition; and administrative, regulatory, and workplace reforms.
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Introduction
National Competition Policy (NCP) — agreed between the Australian, state and
territory governments in 1995 — has delivered substantial and ongoing net benefits
to the Australian community. NCP recognised that competition will generally serve
the interests of consumers and the wider community by providing strong incentives
for firms to operate efficiently, to innovate, and to be price competitive, and for
resources to be allocated to their highest value use.
It has been two decades since the Hilmer Committee developed its blueprint for the
NCP reforms. The Competition Policy Review is thus timely. It affords the
opportunity to question the rationale for current policy settings, to test the need for
new policy initiatives, and to ensure that the community captures the potential net
benefits of increased competition.
In the Commission’s view, however, the introduction or enhancement of
competition will not be desirable or feasible in all sectors or in all circumstances.
Rather than opening every market to full competition, it is important that the
Competition Policy Review considers other policy options, such as the use of
market-based instruments that may capture some of the economic efficiency gains
that competition can offer, or incremental policy changes that may provide the
foundation for increased competition in the future.
This submission draws on previous Commission work that addresses
competition-related issues and policy processes for developing competition policy,
and provides additional in-principle commentary.

Section 1 describes the nature and benefits of competition and its importance in
promoting economic efficiency.

Section 2 presents the Commission’s view on the principles that should guide
competition policy development and the design of governance and institutional
arrangements.

Section 3 draws on the principles in section 2, and identifies opportunities for
further competition policy reform that could enhance community welfare
through improvements in economic efficiency.

Section 4 gives consideration to whether governments should open markets in
the human services sector (such as health and education) to increased
competition, and whether other policy options would be preferable.
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1
The benefits of competition and objectives of
competition policy
The nature and benefits of competition
Competition is a dynamic process that can enhance community welfare by
encouraging greater overall economic efficiency. When an economy is operating
more efficiently, the community is receiving greater value from its scarce resources
and is benefitting from higher real incomes and improved living standards.
In essence, economic efficiency is achieved when resources are allocated such that
any reallocation would make the community worse off. This principle is universal
and applies to decisions by firms about their inputs, outputs and investments as well
as to decisions by consumers about what to buy.
Competition is a not an end in itself, but plays a crucial role in promoting economic
efficiency. In a competitive market, informed choices available to consumers, and
the value signals contained in prices, are important forces. Thus, while producers
seek to maximise their profits, competition or the threat of it limits their ability to
increase profits simply by raising the prices paid by their consumers. Instead, to
remain competitive, they must focus on driving down their cost of production
(productive efficiency). Competitive pricing encourages more efficient levels of
both production and consumption, that is, where the marginal benefits of
consumption equal the marginal costs of production (allocative efficiency).
Competition also encourages firms to invest and innovate to reduce their costs, as
well as increase their revenues by better meeting consumer preferences through
product development and improvement (dynamic efficiency).
In practice, the competitive process drives efficiency improvements by encouraging
the entry of new, or expansion of existing, more efficient firms and forcing the
decline or exit of less efficient ones (‘creative destruction’). Thus, the survival of
particular firms (or types, or a specific number, of firms) is not necessary for, and
indeed can be inimical to, the competitive process and economic efficiency.
At times, some producers may have the ability to set prices (for example, because of
product differentiation or the introduction of an innovative product) but the
associated profits will act as a signal to rival firms. In those circumstances, effective
competitive entry to the market by firms that imitate or improve on the products or
processes can be expected to constrain, and over time erode, this market power.
Economic efficiency may be improved without actual market entry by rivals — the
threat of entry can be sufficient to remove or constrain market power.
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Market power can be enduring where governments or firms have created barriers to
market entry. Firms can use their market power to charge prices that yield
monopoly rents. Where market power is enduring, governments may consider the
need to intervene to improve economic efficiency.
Impediments to efficient market outcomes
Markets may not generate efficient outcomes where the scope of competition is
limited, such as when there are market failures (for example, when there is a lack of
effective competition or inadequate information) (box 1); and when governments
intervene in markets through regulations and policy arrangements, or through the
direct ownership of businesses and the funding of services.
Box 1
Sources of market failure
Externalities arise when the actions of an individual or firm create a benefit or a cost
for others who are not a party to the transaction and these impacts are not reflected in
the transaction prices.
Public goods arise where consumption of a good is non-rivalrous (consumption by
one party does not affect the amount available to others) and non-excludable
(individuals cannot be prevented from consuming the good). Producers and consumers
cannot capture the full benefits of provision and payments for provision cannot be
enforced. Consequently, public goods are likely to be under-provided by the private
sector.
Lack of effective competition may arise in the presence of market characteristics
such as natural monopoly or when the market has a small number of firms that are
able to restrict output and maintain prices above efficient levels. The threat of new
entrants may discourage the use of market power, as may any countervailing power
held by customers. A small number of participants in the market alone is not evidence
of the exercise of market power.
Inadequate information about a transaction can occur where there are barriers
preventing parties obtaining relevant information about the characteristics of a
transaction (most notably risks) and/or each other. In such cases, market participants
may adopt simplified decision rules based on a reduced set of information.
Information asymmetry arises where one party knows more about key aspects of a
transaction than the other party. One possible consequence is ‘adverse selection’ — a
bias toward entering into a transaction that provides a lower quality or higher risk for
the other party. Another potential problem is ‘moral hazard’, which is another form of
risk transfer and occurs when a party exploits an information advantage and this
affects the probability or magnitude of a payment from another party.
Source: PC (2012a).
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Lack of effective competition
A lack of effective competition at any given point in time can provide an incumbent
firm with an opportunity to engage in anticompetitive practices that prevent
competition from emerging. For example, firms with temporary market power can
entrench their market positions by making it difficult or prohibitively costly for
their consumers to switch to other providers. This sort of practice can create barriers
for other firms to enter the market. As another example, a firm might only supply its
product to another party on the condition that the other party does not acquire
products from a competitor of the firm. Most types of exclusive dealing are against
the law only when they substantially lessen competition (although some types such
as third line forcing are prohibited outright irrespective of the supplier’s purpose or
the effect of the practice on competition).
Inadequate information
Markets may not facilitate efficient outcomes where consumers are prevented from
gathering sufficient information to determine the price, quality and other
characteristics of products or services that best meet their preferences. For example,
choosing a health care service provider to treat an acute medical condition is often
made quickly in a stressful situation, and consumers may be unable to make choices
that are in their best interests. Inadequate information can distort market signals and
lessen the degree of competition between actual and potential suppliers.
Government intervention
Governments establish the broad institutional frameworks that underpin market
activity, such as the legal framework that supports property rights and contracts.
Governments also intervene more directly in the functioning of particular markets to
improve safety, raise revenue, promote equity, redistribute income, assist particular
industries or increase economic efficiency. Well-designed intervention can enhance
the operation of markets, for example by reducing transaction costs or by providing
information. At the same time, poorly designed government intervention can
impede the efficient functioning of markets, including through restricting the scope
and benefits of competition. Broadly, governments intervene in markets either
through regulations, policy instruments such as taxes and subsidies, or through the
ownership of businesses and the funding of service delivery.
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Regulations and policy instruments such as taxes and subsidies
Some government regulations and policy instruments restrict the scope for markets
to generate economically efficient outcomes. Participants to the Commission’s
inquiry into electricity network regulatory frameworks highlighted that the design
of regulatory incentives encouraged excessive investment in electricity transmission
and distribution networks (PC 2013c). The costs of these investments are ultimately
passed on to the users of electricity through higher prices.
Regulations and policy arrangements can also decrease economic efficiency by
directly or indirectly impeding competition. Pharmacy ownership regulations
directly impede competition by preventing supermarkets and retail chains from
operating in-store pharmacies. Similarly, the licensing of some professional services
diminishes competition in the supply of labour to those professions. More recently,
direct impediments to competition have been introduced in coastal shipping and
wholesale markets for broadband services.
Competition can be impeded indirectly in industries where prices are regulated —
where prices are set too low, market entry is less attractive to other firms. Policy
arrangements such as industry subsidies also distort market signals by shielding
assisted firms from competitive pressures.
Regulations that have the sole purpose of protecting firms in a particular industry
are unlikely to provide net benefits to the community. However, there are some
specific and limited circumstances where governments can improve community
welfare by impeding competition, including where competition is in conflict with
the achievement of other objectives, such as the promotion of equity. The issuing of
patents may improve efficiency and community welfare by increasing the incentives
for firms to innovate, which can in turn lead to new, improved or less expensive
products. At the same time, patents are a potential source of market power.
Intellectual property issues are discussed further in section 3.
Government ownership of businesses or the funding of services
Government ownership of businesses can reduce economic efficiency. Among the
reasons for this is that governments often impose conflicting objectives on
businesses that they own (or services that they fund) and may fail to give
weightings or rankings to profit maximisation and price minimisation, efficiency
and equity imperatives, environmental outcomes, the delivery of community service
obligations and other obligations (such as local procurement and employment
benefits). Related to this, government-owned businesses may be subject to political
intervention. Government-owned businesses are also unlikely to be subjected to the
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same level of scrutiny as private businesses when obtaining funding, and as a result,
they are unlikely to face the same financial incentives to manage risk efficiently
(PC 2013c). Finally, government-owned businesses do not face market tests for
survival. Consequently, they will often have weaker incentives to operate efficiently
than their private sector peers (or deliver services that consumers prefer), with the
costs ultimately passed on to consumers and the community more broadly.
Government ownership of businesses or funding of services can also reduce
economic efficiency by distorting the competitive process. Governments might use
their legislative or fiscal power to advantage their own businesses over those in
private ownership. This may take the form of government businesses borrowing at
below-market interest rates (with the benefit of explicit or implicit government
guarantees), or enabling government businesses to operate while earning a
sub-commercial rate of return. (The role of competitive neutrality policy in providing
market discipline to government businesses is discussed below.)
Government funding arrangements and procurement processes for service delivery
can also distort competition if they preclude more efficient providers from entering
the market, or can reduce the frequency of entry (and exit) through the lack of regular
market testing. In some instances, government failure to create efficient market
structures for the delivery of publicly funded services can also distort competition.
Objectives of competition policy
The objective of competition policy should be to improve community welfare by
increasing economic efficiency. Competition policy should focus on conduct or
rules that harm the competitive process, as opposed to conduct or rules that harm
specific firms or types of firms. Hence, the case for any further reforms to
competition policy should rest on their capacity to enhance the efficiency outcomes
from competition for the community as a whole, rather than on their specific
benefits (or costs) to a particular sector, industry, firm or type of firm. This means it
is important that decision makers are not unduly influenced by features of the
market, such as the number of actual competitors, when considering the need to
introduce policy measures to open markets to more competition, or in analysing
when to apply competition policy or competition law.
Competition policy should focus on the process of competition and, to the fullest
extent possible, should be neutral to the type of technology or business practice
employed (box 2). At the same time, competition policy should recognise that
competition is a means to an end, and that it is neither desirable nor feasible to open
markets to more competition in every sector, activity or circumstance. Strong policy
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development processes and institutional arrangements should therefore underpin
competition policy (discussed in section 2).
Box 2
The emergence of new technologies and business models
The nature of competition is evolving. Globalisation and e-commerce are lowering the
barriers to entering some markets, opening up new sources of competition and
increasing consumer choice. Digital-based competition is an emerging presence in
many markets. The Internet and e-commerce have also increased the amount of
information available to consumers through, for example, price and product
comparison websites, and by facilitating a reduction in search and transaction costs,
including for imported purchases.
A current example of technology opening up a new source of competition is the
emergence of Uber, which uses a smart phone application to connect consumers and
providers of passenger vehicle services. Uber competes with the taxi industry, an
industry that has successfully stalled competitive reforms and benefited from a restrictive
regulatory framework that raises service costs for consumers. The regulatory response
to Uber’s receipt and dispatch service may differ across jurisdictions due to variation in
state and territory commercial passenger vehicle service legislation. Under Victorian
legislation Uber’s service is regulated as a hire car service (not a taxi service). Some
jurisdictions are still formulating their regulatory responses to Uber’s receipt and dispatch
service.
New digital-based sources of competition can deliver mixed outcomes for the
community. On the one hand new sources of competition can promote community
welfare by driving increases to economic efficiency. On the other hand new competitors
or different business models may be able to skirt regulation that serves a legitimate
purpose, such as protecting public safety or data security, leading to practices that might
be detrimental to the community.
Competition policy should be able to accommodate all new sources of competition, and
be sufficiently flexible to accommodate alternative models of service and product
delivery. Governments should not impede new sources of competition to protect ‘their
patch’ of the regulatory framework, incumbent firms or the users of a particular
technology.
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2
Principles underpinning sound regulatory
processes and institutional arrangements
Good regulatory processes are important not only for achieving good competition
policy outcomes, but also for building support for policy reforms through
demonstrating the case for change. The Commission’s views on the principles that
should guide regulatory processes (and associated governance and institutional
arrangements) are set out in box 3. Processes and institutions associated with each
stage of developing a regulatory regime are considered in turn below, drawing on
lessons from previous reforms.
The importance of good process in developing policy and
communicating the case for reform
At the outset of the policy development process, an institutional capability should
be applied to objectively evaluate the effectiveness of existing policy arrangements,
to identify policy reform options, to consult widely and transparently, and to offer
governments an unbiased assessment of the reforms necessary to improve the policy
framework.
Reform efforts that have had a flawed process for policy development have
undermined the achievement of sound policy outcomes — often evidenced by
inadequate objective analysis, poor design or rushed implementation. Recent
examples include state governments promoting projects that are yet to be fully
evaluated, and the truncated timeframe for implementation of the National
Disability Insurance Scheme.
The process under which competition policy is developed is critical not only to
getting policy changes right, but also to building and communicating the case for
reform. A properly constructed, transparent review process can generate stakeholder
engagement and promote public awareness and acceptance of the need for reform,
the issues and trade-offs associated with different policy approaches, and the
resultant community wide benefits. International case studies illustrate the
importance of transparency of the policy process in winning stakeholder and public
support for reform (OECD 2009).
Appropriate consultation is a critical part of policy development. It is a two-way
process: it allows stakeholders to put their views forward and also tests the thinking
of policymakers and provides a forum for them to communicate the reasons for
pursuing a particular solution.
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Box 3
Principles of good regulatory process
Policy development

Articulate the policy problem to be addressed:
– determine the type of market failure (or regulatory barrier), and identify any equity
or other distributional issues that need to be addressed
– include why the problem is of sufficient magnitude to warrant priority assessment
– identify why (and which level of) government needs to be involved.

Specify the objectives that are to underpin the policy solution.

Assess the costs and benefits of the most feasible policy options to determine the
option that generates the greatest net benefits to the community:
– ensure appropriate governance of the assessment process and the capability
and objectivity of the body responsible for policy assessment — this body should
have transparent and consultative procedures, as well as the timeframe and
resources to develop well thought out, evidence-based recommendations
– explore all fiscal, administrative and regulatory tools available to government
– include the option of doing nothing
– identify linkages to, and consistency with, other policy objectives and the most
effective sequencing of reforms and their implementation
– include the ‘flow-on’ costs to the broader economy, including distributional
consequences and environmental costs.

Ensure the policy is clear and simple.
Implementation and administration

Develop governance arrangements for implementing and administering the policy:
– regulatory institutions should be accountable, and decisions transparent
– guidance should be provided to regulators and regulated entities to ensure the
objectives of the policy are clear
– there should be appropriate recourse to appeal regulatory decisions.
Policy monitoring and review

Develop policy monitoring and periodic review arrangements, with consideration
given to the institutional capacity to undertake monitoring and review:
– unnecessary or ineffective regulation should be revised or removed
– the policy should be subject to review to ensure its ongoing appropriateness.
Sources: Australian Government (2010); COAG (2007); OECD (2005).
Consultative processes and the raising of community awareness take time. For
example, the Petroleum Resource Rent Tax took about two years to be developed
and about two more to be refined through intensive consultations with industry
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before it was implemented in 1989. By contrast, the Resources Super Profits Tax
was announced (following the Henry Tax Review) with far less public consultation.
The design of the resource rent tax and the rushed process by which it was
introduced was severely criticised. An alternative Minerals Resource Rent Tax was
introduced but the willingness to embrace reform had been lost. The subsequent
public debate around the design and introduction of a resources rent tax has
consequently eliminated from dispassionate analysis any question of whether better
tax arrangements would serve to benefit the community as a whole, and if so how
they might be best designed and implemented.
Determining priority areas for policy reform
The pursuit of multiple reforms simultaneously can be challenging for the affected
stakeholders and for governments, particularly for major reform programs.
Attempting to do too much at once can dilute the resources available to undertake
ex ante evaluation of policy proposals or to review current programs or regulatory
arrangements, reduce the scope for effective stakeholder participation, and ultimately
compromise the potential for beneficial reforms. Also, governments can become
concerned that multiple reforms might dilute their political capital.
Accordingly, major reform programs have often prioritised the policies to be
assessed, focusing on those with greater payoffs first. For example, the Australian
Government applied a tiered screening process in the Legislative Review Program
under NCP, with a Council representing different community groups appointed for
the purpose of determining those regulations needing detailed review.
In prioritising reforms to competition policy, attention should be paid to the
potential benefits as well as the costs of developing and undertaking reforms.
Payoffs will generally be greater:

the deeper the impacts of changes that are likely to come from reform

the broader these impacts are across the community

the lower the costs of planning and implementing the reform (PC 2011e).
The sequencing of reforms is also essential to their effective implementation,
particularly where one reform provides the foundation for another. For example,
NCP was preceded by reforms that opened international markets for currency,
capital and goods, which created pressure for further reforms in key domestic
markets. Also important is the demonstration effect of successful reforms in
building support for further reform (especially those with immediate and apparent
benefits) — another reason to prioritise reforms with greater payoffs first.
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Policy objectives should clearly target the identified problem
All government policy should address an identified and material policy problem,
have a clear set of objectives that are relevant to the identified problem, and have a
rationale as to why government (and which level of government) needs to be
involved in addressing the problem.
The Commission’s report into the urban water sector highlighted that governments
had assigned multiple and conflicting objectives to their agencies, utilities and
regulators in the urban water sector, and had provided inadequate guidance on how
to make trade-offs between those different objectives (PC 2011a). The Queensland
Competition Authority, for example, was required under its legislation to have
regard to more than a dozen matters when making a price determination. The
Commission recommended that governments should articulate a common objective
for the urban water sector associated with maximising net benefits to the
community by providing water-related services in an economically efficient
manner.
Identifying the policy problem: context matters
In identifying the policy problem that government policy should address, it is
important to consider the broader context to determine whether an apparent problem
justifies government intervention. The presence of a monopoly provider, for
example, is not sufficient evidence to determine that market power is being
exploited, or that government should intervene.
In its inquiry into wheat export marketing arrangements, the Commission found that
although port terminal facilities used for bulk wheat exporting are perceived by
many policymakers and industry participants as having ‘natural monopoly’
characteristics — a market characteristic that can lead to market failure (box 1) —
industry-specific access arrangements were not required following a transition
period to 2014. This reflected broader considerations such as constraints on the
ability of port operators to take advantage of any market power they might have,
incentives to maximise the level of throughput at port terminals (rather than deny or
restrict access to extract higher prices as a monopolist may do) as well as the role of
Part IIIA of the Competition and Consumer Act 2010 (Cwlth) (CCA) as a general
backstop for access issues (box 4).
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Assessing the costs and benefits of policy options
An assessment of the costs and benefits of policy options to address the policy
problem should be undertaken to determine which option is likely to generate the
greatest net benefits to the community. The evaluation should assess the range of
feasible options that would meet the policy objective, including the option of doing
nothing.
Even where there is a market failure or regulatory impediment to increased
competition, the costs of policy to address imperfect competition might still
outweigh the benefits, and should be considered on a case-by-case basis. For
example, the risk of regulatory error needs to be weighed against the costs of market
failure, and any policy change needs to be subjected to analysis of the risk of
perverse or unintended consequences.
Box 4
Wheat export facilities
The Productivity Commission found in its 2010 report on wheat export marketing
arrangements that the transition to competition in exporting bulk wheat had progressed
relatively smoothly, aided by the government’s role in requiring accreditation
arrangements for bulk exporters, and the sector-specific access regime for port
terminal services. Under the Wheat Export Marketing Act 2008 (Cwlth), port terminal
operators that export wheat were required to pass an ‘access test’ as part of an access
regime. The access test included a mandatory requirement (from 1 October 2009) to
have an access undertaking that sets out the terms and conditions of access to port
terminal services for other businesses (unless an effective access regime was in force)
accepted by the Australian Competition and Consumer Commission (ACCC).
However, the Commission expressed concern that, over time, the access regime would
provide incentives for wasteful strategic behaviour by both port terminal operators and
traders, constrain the efficient delivery and pricing of port services, and reduce the
incentives for investment in terminal facilities and dependent supply chains. The
Commission also highlighted factors that limited the ability of bulk wheat terminal
operators to take advantage of any market power they might have, including the highly
competitive nature of the global wheat market and benefits to bulk wheat terminal
operators from maximising throughput at port terminals.
Accordingly, the Commission recommended that, at the end of a period of transition,
the accreditation scheme be abolished in September 2011, and the access regime be
abolished in September 2014. This would remove the mandatory requirement for port
terminal operators that export wheat to have an access undertaking accepted by the
ACCC. The Commission noted that the generic Part IIIA regime would still be available
to deal with access disputes and advocated the development of a voluntary access
code to supplement the Part IIIA backstop.
Source: PC (2010c).
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A comparison of costs and benefits of policy that affected competition was a
systematic part of the legislative reviews under NCP. A key feature of those reviews
was that arrangements that inhibit competition were to be retained only if they could
be shown to be in the public interest — that is, it needed to be demonstrated that the
benefits of restrictions to competition outweighed the costs.
The NCP approach represented a reversal of the traditional onus of proof (under
which it is up to the proponents of change to demonstrate that the change would
yield net benefits) on the grounds that theory and evidence strongly suggest that
removing restrictions on competition will typically improve community welfare.
Also, requiring those who benefit from legislative restrictions on competition —
and thus those who typically have most incentive to see those restrictions retained
— to address the wider community effects of those restrictions can act as a
counterweight to political pressure from vested interests to ignore the less readily
identifiable costs (PC 2005b).
Given the potential benefits from competition outlined in section 1, the Commission
considers that it remains appropriate to require advocates of restrictions to
competition to demonstrate net community benefits from those restrictions. Such a
requirement should be built into the governance framework of future competition
policy reviews.
Who wins and who loses? The distribution of costs and benefits of policy reform
In building a case for competition policy reform, it is important to consider not just
the aggregate costs and benefits of policy change, but also who in the community
will benefit from the change, and who will lose — both in the short term and over
time. In many policy reforms there is potential for those who lose from a policy
change to be concentrated, organised and vocal, whereas those who are likely to
gain will often be dispersed more widely throughout the community. As gains to
individual winners are often small, they are often poorly informed about the
trade-offs and will devote few resources to achieving those gains.
Removing regulations that reduce competition in the provision of pharmacy
services is one example of where the benefits of reform are likely to be much more
widely dispersed than costs. A level of competition-based deregulation could
provide opportunities for supermarkets and other retail chains to operate in-store
pharmacies (with appropriate quality and safety safeguards in place). Retail chains
may be able to take advantage of economies of scale and scope in the provision of
pharmacy services and offer greater convenience for many consumers — the
benefits would be received by a very large segment of the population. In
comparison, the costs associated with reduced value of some pharmacy businesses
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are likely to be concentrated among existing owners of pharmacies. Of course,
whether the overall benefits exceed the costs remains a matter for proper analysis
and should not be pre-judged.
Institutional arrangements for policy development
Institutions responsible for policy assessment and development need to be
appropriately placed and adequately resourced (in terms of skills and funding) to
undertake the consultative, transparent process described above. There can also be
advantages from holding policy assessment processes that are independent from
government. This can assist in developing public support through indicating that
policy advice is not only ‘expert’ but also removed from politics in what are often
complex and potentially sensitive areas. Governments can also benefit from
observing the views of stakeholders, the analysis of experts and the reaction of the
community to reform proposals, before having to make a final decision.
Implementation and administration
Where a regulatory solution is identified as the best vehicle for implementing
reform, the second stage involves the detailed design and making of the regulation
and administration of that regulation — including assignment of responsibilities and
accountabilities. Object clauses and guidelines for regulators need to encourage
cost-effective and risk-based approaches to administration and enforcement.
Drafting should make the intent of policy clear and establish the desired scope for
regulators to interpret the regulation. Where embedded legislative reviews are to be
provided for, their scope, governance and data collection requirements need to be
specified.
Institutional arrangements for regulators
The institutional design and capability of the regulatory, advisory and decision
reviewing agencies are fundamental to the proper application of the legal and policy
framework. The institutional arrangements need to clearly assign responsibilities,
provide for appropriate incentives and ensure that the institutions have adequate
capabilities and resourcing. A number of principles and leading practices have
emerged from Commission inquiries and research that can provide guidance for
good governance arrangements for regulators and other agencies (PC 2013c). These
principles include that the regulator:
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
has been given clear and appropriate objectives, such as to maximise community
wellbeing or economic efficiency, and guidance on which objectives to prioritise
where they conflict

has a governance structure and statutory appointment process that ensures
independence and expertise

has staff with appropriate expertise and skills, and adequate funding to
efficiently fulfil its functions

is consultative, transparent and timely in making decisions

is accountable to others for its actions and decisions and can have its decisions
reviewed by an appropriate body

is subject to periodic independent reviews of its capability and performance.
Governance of ACCC informal merger decisions
The Competition Policy Review may wish to consider the transparency and
accountability of Australian Competition and Consumer Commission (ACCC)
decisions under the informal merger review process. Since the Dawson Review of
the Trade Practices Act in 2002-03, the ACCC has taken steps to increase the
transparency of its informal merger process, including issuing Public Competition
Assessments (box 5). However, it has been suggested that these steps do not provide
sufficient transparency in informal merger decisions because there is no access to
third-party submissions, and detailed reasons for decisions may not be publicly
available (Williams 2014).
One way to increase the transparency and standing of the ACCC’s process and the
expertise feeding into the informal merger review process may be for an
independent, peer-based panel to provide further advice to the ACCC. Panel
members with expertise in mergers and acquisitions (similar to the Takeovers
Panel) could provide advice on the legislation and its intent, taking into account a
range of commercial and market factors. The panel’s advice could be made public,
with the final informal review decision being left in the hands of the ACCC (as is
currently the case).
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Box 5
Merger reviews
Section 50 of the Competition and Consumer Act (CCA) stipulates that mergers are
prohibited if it can be demonstrated that they will have the effect or likely effect of
substantially lessening competition. Merger parties have three avenues available to
have a merger considered and assessed on competition grounds.
1. Informal merger review: The informal merger review process provides the merger
parties with the ACCC’s informal view on whether a merger proposal is likely to
breach s.50 of the CCA.
2. Formal merger clearance: Formal merger clearance from the ACCC confers legal
protection to the person to whom clearance is granted from the application of s.50 of
the CCA.
3. Merger authorisations: Merger parties may seek legal protection from court action
under s.50 of the CCA by applying to the Australian Competition Tribunal for
authorisation of the merger proposal.
Almost all applications to date have proceeded through the informal merger review
process. The ACCC will explain the reasons for its decision on an informal merger in a
summary on the mergers register. A more detailed Public Competition Assessment is
published where: a merger is rejected; a merger is subject to enforceable undertakings;
the merger parties seek such disclosure; or a merger is approved but raises important
issues that the ACCC considers should be made public.
Review of regulatory decisions
There is general agreement that some recourse to appeal regulatory decisions is
appropriate. Review bodies should be independent of policymakers and the
regulatory bodies that they review. They should also possess sufficient resources
and expertise to appropriately review decisions as required.
However, there is often debate over the appropriate form of review. An important
distinction exists between merits review and judicial review. Judicial review is
concerned with the legality of the decision-making process (and is provided for
under the Australian Constitution) (ARC 2003).
Merits review generally involves reconsideration of the facts, as they apply to a
particular decision, in order to determine the correct or preferable decision. The
availability and type of merits review of regulatory decisions varies by sector and
by jurisdiction (box 6).
Merits review processes can be time consuming and costly. For example, the time
taken to resolve some third-party infrastructure access matters under Part IIIA of the
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CCA has been lengthy — the Pilbara rail case is the standout example of an access
matter that became mired in a complex legal dispute (PC 2013d).
The appropriate balance between the process and accountability benefits of merits
review and the associated resource costs will vary on a case-by-case basis, but some
form of limited merits review of decisions by regulatory bodies will typically be
appropriate. For example, a review of the limited merits review regime for
electricity and gas networks headed by Professor George Yarrow concluded that
changes should be made to arrangements in energy markets, but that properly
structured limited merits review was preferable to relying on judicial review only,
or introducing full merits (de novo) review (Yarrow, Egan and Tamblyn 2012).
Similarly, the Commission concluded that merits review of declaration decisions
under Part IIIA of the CCA is likely to be more confined and more timely than in
the past (following a High Court decision in 2012) and that maintaining a limited
merits review process was appropriate (PC 2013d).
Box 6
The scope and type of merits review varies
In some cases, merits review processes are explicitly limited in scope.

An access seeker or service provider can apply to have a decision on declaration
under Part IIIA of the Competition and Consumer Act (CCA) (made by the Minister,
who is informed by recommendation of the National Competition Council) reviewed
on its merits by the Australian Competition Tribunal. Merits review is confined to
consideration of information taken into account by the original decision maker, along
with additional information that the Tribunal considers reasonable and appropriate
(but not so as to constitute broad additional investigations).

Affected or interested parties can apply for pricing determinations for gas and
electricity network suppliers by the Australian Energy Regulator to be reviewed on
their merits by the Australian Competition Tribunal. Merits review is limited to cases
where there is a materially preferable outcome on the basis that the original
decision maker made an error of fact, incorrectly exercised discretion or was
unreasonable.
In others, merits review processes constitute a full re-hearing of the original decision.
For example, an applicant or interested party can apply for ‘re-hearing’ by the
Australian Competition Tribunal of decisions of authorisations (authorising conduct that
may otherwise be prohibited) by the ACCC under Part VII of the CCA.
Sources: ACCC (2013); PC (2013d); Yarrow, Egan and Tamblyn (2012).
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Policy monitoring and review
Ex post evaluation of the outcomes of competition policy reform is important not
only to determine the extent to which desired outcomes were achieved, but also to
help generate or maintain support for further necessary reforms. It is important to
demonstrate to the community that reforms were worthwhile — that is, that the
community is better off. Evaluation needs to be proportionate to the nature and
significance of the regulations concerned, and be able to address the issues that are
germane to their performance.
Evaluation can involve a mixture of quantitative and qualitative techniques to draw
causal links between policy and outcomes. Cost–benefit analysis can be used for
both prospective evaluations of options for government action (discussed above)
and for retrospective evaluation of policy. Policy evaluation should seek to assess
change against a counterfactual scenario, draw on evidence from multiple sources
(particularly when relying on subjective evidence), and report on the confidence in
the findings of the evaluation. Any unintended consequences from the policy should
be considered.
Policy monitoring and periodic review is also important to ensure that unnecessary
or ineffective regulation or other governmental intervention is revised or removed.
‘Sunsetting’, whereby a regulation will lapse if it is not re-made after a certain
period (typically five to ten years), may provide a basis for evaluating the ongoing
worth of the regulation.
Institutional arrangements for policy monitoring and review
Ex post monitoring and review of policy needs to be undertaken transparently, by an
independent and expert body. Bodies responsible for monitoring and reviewing
policy should be independent of those responsible for implementing and
administering the policy.
The reviews necessary to identify and implement reforms to regulation require
people who are at least as skilled as those responsible for developing the regulations
in the first place. The Commission has strongly advocated that the Australian
Government should commit to building skills in evaluating and reviewing
regulation (PC 2011e).
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Generating momentum for (and sustaining) the reform process
The potential for those who benefit from reform to be more widely dispersed
throughout the community than those who lose can make advancing competition
policy reforms politically difficult, even where the overall benefits to the
community as a whole outweigh the costs to the few. The experience with previous
reforms provides some lessons on how beneficial reforms can be advanced.
Should affected parties receive compensation?
There will often be calls by those that are negatively affected by policy reform for
compensation to ameliorate the costs they face. The value of capital assets such as
property, licences and quotas can be inflated by above-market prices (in large part
due to the market distortions of those restrictive licences and quotas), and returns to
those investments will decline in some cases even at the prospect of more
competition. A reduction in the artificially inflated value of assets held by
incumbents (and the excess returns they have enjoyed during those times) does not
necessarily provide justification for compensation.
The tax and transfer system and other generally available measures can assist
adjustment and moderate adverse distributional impacts that arise from
policy-induced change. These measures should be relied on in most cases.
However, they are not designed to handle all contingencies and there may be some
limited circumstances where additional measures, such as direct compensation or
specific adjustment assistance, are warranted.
As the Commission set out in its 2001 research paper on structural adjustment, the
case for additional measures should be assessed on a case-by-case basis but is likely
to be strongest where a proposed policy change:

imposes

imposes large and/or unexpected losses in income or wealth on a minority of
individuals, even if they are not among the most needy or vulnerable in society

involves a largely unanticipated and material change to a well-defined and
defensible ‘property right’ (PC 2001b).
a clear and sizeable burden on a specific group in the community
(particularly if the affected group is relatively disadvantaged)
Assistance designed to ‘buy-off’ opposition or act as a ‘circuit breaker’ to progress
a policy change is fraught with difficulties and carries considerable risks. Singling
out particular groups for special treatment runs the risk of jeopardising fair process
and — without a clear basis for deciding which groups should be paid off — is
unlikely to yield consistent and equitable outcomes. A decision to compensate the
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opponents of a specific policy proposal is likely to encourage others to lobby
against other proposed policy changes in the hope that they too will receive
compensation.
Should states and territories receive payments from the Commonwealth for
progressing reforms?
Competition policy reforms often relate to matters that are the responsibility of the
states and territories, so that reforms formulated collectively at a national level need
to be implemented across multiple jurisdictions.
Payments under past reform programs
A feature of the NCP institutional framework was the use of financial incentives
from the Australian Government to the states and territories. These competition
payments were dependent on the jurisdictions making satisfactory progress in
meeting their commitments. The main rationale for the payments was that reforms
would generate income gains that would in turn yield tax revenue which accrued
disproportionately to the Commonwealth — one of the characteristics of the vertical
fiscal imbalance which exists between the Commonwealth and the states and
territories.
The National Competition Council (NCC) had the role of independent monitor and
assessor of different jurisdictions’ progress in implementing NCP reforms. The
NCC identified where commitments had not been met or where the actions of the
jurisdictions fell short, bringing a level of transparency to the reform process.
Whether particular jurisdictions received their competition payments in full
depended largely on the NCC assessments of their progress. The Australian
Government Treasurer was responsible for the final decision on the level of any
penalty (which was deducted from actual payments made).
The Australian, state and territory governments committed to further policy reform
under the 2009 National Partnership Agreement to Deliver a Seamless National
Economy (referred to hereafter as the National Partnership Agreement). The
Australian Government agreed to provide payments, including reward payments to
those jurisdictions that deliver on nationally significant reforms based on the
achievement of performance benchmarks outlined in the Agreement. The COAG
Reform Council has, to date, had responsibility for assessing whether the
benchmarks have been achieved and reporting publicly on governments’
performance.
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Lessons from past reform programs
Evidence received by the Commission in the course of its review of NCP indicated
that it would have been much more difficult to make progress without competition
payments (PC 2005b). It should be noted, however, that competition payments did
not ensure compliance with the reform program, and that at times substantial
penalties were incurred by some states and territories.
The Commission also found that providing for ongoing independent assessment of
governments’ progress in implementing reform commitments by the NCC was a
major strength (PC 2005b). The institutional arrangements that defined the role and
independence of the agency responsible for determining the rationale for a payment,
the magnitude of the payment and whether the jurisdiction had made satisfactory
progress against its reform commitments were seen as important.
A shortcoming of the approach under the more recent National Partnership
Agreement was that payments were based on achievement of process milestones
rather than outcomes. The COAG Reform Council observed in its monitoring that
the achievement of reform milestones does not necessarily reflect effectiveness in
achieving reform outcomes (COAG Reform Council 2011).
The linking of payments to process milestones rather than to outcomes led to a
timing mismatch, whereby reward payments were ‘front-ended’ well in advance of
any fiscal (or other) benefits. For example, reward payments of $200 million were
provided to jurisdictions as part of the National Partnership Agreement in 2011-12
(Australian Government 2013). When combined with facilitation payments of
$100 million in 2008-09, this meant that more than half of total payments
committed under the National Partnership Agreement ($550 million) had already
been paid by 2011-12 (COAG Reform Council 2013). By contrast, the Commission
estimated that less than 5 per cent of the prospective benefits of 17 COAG business
regulation reforms under the National Partnership Agreement had been realised by
2012 (PC 2012c). There is the real risk that the Commonwealth delivered more in
reward payments that has been delivered in reform outcomes.
Is there a role for payments to jurisdictions as an incentive to progress reform?
Participants to the Competition Policy Review may point to the role of competition
payments in generating reform outcomes under NCP as evidence that incentive
payments should feature in future reform agendas, as a form of leverage to achieve
reform outcomes. However, where policy development has been guided by sound
principles — and the benefits of the proposed reforms have been clearly
demonstrated to outweigh the costs to the community and articulated to the
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community as such — then the reforms should be undertaken in order to capture
those net benefits. Again, this highlights the importance of clearly building and
communicating the case for reform through a robust, transparent and consultative
policy development process.
As for affected parties elsewhere in the community, payments to states and
territories that are designed to ‘buy-off’ opposition are fraught with difficulties and
carry considerable risks. Jurisdictions that are ahead in implementing reforms would
consider that they are not duly rewarded for having progressed reforms that other
jurisdictions are paid to implement later. Indeed, an excessive focus on fiscal
compensation — rather than wider economic and social benefits from reforms —
could induce jurisdictions to hold off on implementing beneficial reforms in the
expectation that they might receive incentive payments to do so later.
Is there a role for payments to compensate for fiscal imbalances?
Participants to the current Review might also advocate payments to states and
territories on the basis that those jurisdictions are likely to incur the costs of reform,
whereas the fiscal benefits flow primarily to the Commonwealth. This is a
consequence of the constitutional allocation of limited but significant functions to
the Commonwealth, and the associated vertical fiscal imbalance, where the states’
and territories’ revenue raising powers are insufficient to fund their expenditure
responsibilities, while the Commonwealth raises more revenue than it requires for
its expenditure responsibilities.
On balance, the Commission does not at this time support further payments to states
and territories for progressing reforms. Further payments would risk creating
unintended incentives through elevating fiscal considerations ahead of wider
economic and social benefits. Vertical fiscal imbalances would be better addressed
directly — the Commission is mindful that the Government has initiated a
Federation White Paper and a Taxation White Paper, and thereby an opportunity to
directly address some of the issues relating to vertical fiscal imbalance.
Broad-based reform
A broadly-based reform program can make it easier for governments to progress a
set of individual reforms that might be difficult to implement on a stand-alone basis.
A broadly-based and integrated reform agenda — as was the case for NCP —
improves the prospect that those who might lose from one specific reform can
benefit from others and gain overall. As such, a broadly-based program can
moderate adverse distributional effects. For this reason, where the effects of policy
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changes are broader, compensation of affected parties is less likely to be justified on
equity grounds.
The need for political commitment to drive policy reform
Political commitment at the state and Commonwealth level, rather than monetary
transfers, drives policy reform. Absent political commitment, the whole exercise is
continuously in danger of becoming a search to forgive inadequate performance, or
to weaken policy goals. The OECD has found that ‘political commitment to
regulatory reform has been unanimously highlighted by country reviews as one of
the main factors supporting regulatory quality’ (OECD 2010, p. 244). Agreement on
the main problem areas and policy approaches that were required was an important
part of progressing reform under NCP. By contrast, reversal of political support was
identified as an issue in the context of the most recent COAG reform agenda, in the
light of leadership changes and the emergence of competing issues (PC 2012c).
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3
Opportunities for further competition reform
Improving competition law
Australia’s core competition law provisions are contained in the CCA. The object of
the CCA is to ‘enhance the welfare of Australians through the promotion of
competition and fair trading and provision for consumer protection’. The ACCC is
responsible for ensuring compliance with and enforcement of the CCA.
Industry-specific legislation and mechanisms such as enforceable undertakings are
used on a case-specific basis (such as NBN Co and Australia Post) to apply
competition law principles in a particular manner.
Competition law can increase economic efficiency by discouraging firms from
interfering with the competitive process. It can provide for some degree of certainty
and transparency about whether certain types of practices are acceptable. The CCA
prohibits outright some practices (such as price fixing), while others (such as the
merger provisions) require an assessment of whether the conduct would have, or
would be likely to have, the effect of substantially lessening competition.
It is important that regulatory and policy arrangements are periodically reviewed to
ensure that they are promoting community welfare by protecting the competitive
process, as distinct from protecting particular firms or types of firms. Aspects of
competition law may require review to ensure that they strike the right balance
between prohibiting anticompetitive conduct on the one hand, and allowing
efficiency-enhancing conduct on the other. Examples are discussed below.
Section 46 and the purpose test
There has been debate over whether the market power provisions of the CCA
(outlined in s.46 of Part IV of the Act) should only apply when a firm engages in
anticompetitive conduct for a particular purpose, or whether there should also be a
focus on the effect of the conduct. While some have argued the evidentiary burden
for the current purpose test is too high (which risks allowing anticompetitive
conduct), the Commission considers that a high evidentiary burden is not sufficient,
in itself, to justify changing the legislation. Changing the legislation to include an
effects test would itself bring regulatory risks, particularly if the threshold to make
the test were too low. A thorough analysis of the costs and benefits should be
undertaken to determine whether the market power provisions in the CCA should be
reformed, including whether statutory guidance should be given as to the burden of
proof required to meet the purpose test if it is to continue.
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Part VIIA
Part VIIA of the CCA provides for three types of price oversight: public inquiries;
price notifications; and monitoring and reporting. Formerly contained in the Prices
Surveillance Act 1983 (Cwlth), these prices surveillance provisions have been
applied to sectors of the economy, such as aviation infrastructure and harbour
towage services, that were considered to be not subject to competitive pressures.
The Part VIIA framework was comprehensively examined in the 2001 Commission
review of the Prices Surveillance Act (PC 2001a). The Commission expressed
strong reservations about regulatory intervention:

In markets where competition is not strong, regulators attempt to emulate the
efficient outcomes they believe would occur in more competitive markets. Yet this
is a complex task requiring information that typically is not available. Hence,
intervention may well result in prices that are more inefficient than would occur in
the unregulated market, doing more harm than good to consumers and to the
economy generally.

Because of these risks, prices oversight is likely to be warranted only when there is
substantial market power and when other pro-competitive options are not available.
(p. XIII)
In its review of the price regulation of airport services, the Commission highlighted
the lack of clarity on the circumstances in which a public inquiry under Part VIIA
might be initiated, and how that inquiry process is to be progressed (PC 2007). The
Commission also raised concerns that this uncertainty led to the view that there was
a lack of a credible threat of regulatory intervention underpinning light-handed
regulation. The Commission concluded that:
This gap in the current arrangements is contributing to perceptions in some quarters
that the threat of re-regulation, if there is misuse of market power by airports, is not
a credible one. (p. XVIII)
As discussed above, regulatory frameworks should be periodically reviewed to
ensure they are warranted and effective. The Competition Policy Review provides
an appropriate opportunity to review Part VIIA given the changing economic and
market circumstances that have taken place since the prices surveillance provisions
were introduced.
Participants and others have raised several issues that the Review Panel could
explore, and the Commission notes the following — while not forming a view on
any of them. The Panel could explore the merits or otherwise of:

addressing the consequences of any imbalance of bargaining power between
firms (particularly where small businesses are concerned)
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
addressing the exercise of substantial market power through pricing with offence
provisions under Part VIIA (where this behaviour does not constitute an offence
under another part of the CCA) — European law is sometimes referred to in this
context

including a general pricing offence in Part IV and repealing Part VIIA

Part VIIA taking account of product or service quality (as well as price) to
provide a basis for a more complete assessment of whether a firm had abused its
market power.
The Commission considers, in the light of the evidence about efficacy and
compliance costs from its own previous investigations and findings, that Panel
recommendations to reform Part VIIA should be preceded by a thorough assessment
of potential costs and benefits of reform options, based on a clear view of the policy
problem that needs to be addressed.
Intellectual property
The legislative framework governing intellectual property is another area that may
require further scrutiny by the Competition Policy Review. In its report into the
compulsory licensing of patents, the Commission highlighted the overlap between
patent law and competition law as an area for reform (2013b). The Commission
recommended removing a provision from the Patents Act 1990 (Cwlth) so that a
compulsory licence based on the anticompetitive conduct of a patent holder is only
available under the CCA. The Commission also recommended amending the CCA to
explicitly recognise compulsory licences as a potential remedy under the Act. In
addition, the Commission saw no reason why the CCA should include an exemption
for certain conduct involving intellectual property from some provisions of the Act.
Australia, as a net importer of intellectual property, has likely incurred net costs from
the inclusion of some intellectual property provisions in trade agreements. For
example, analysis indicates that extensions in the duration of copyright protection
required by the Australia–United States Free Trade Agreement imposed net costs on
Australia through increased royalty payments (PC 2010b). The Australian
Government should therefore be cautious about entering future trade agreements
where the United States or other countries prescribe intellectual property
arrangements that could be costly to Australia. The proposed Trans-Pacific
Partnership Agreement between Australia and various other countries including the
United States, as well as other proposed international agreements such as the
Transatlantic Trade and Investment Partnership, are specifically considering
intellectual property issues.
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While the issuing of patents can improve efficiency and community welfare by
increasing the incentives for firms to innovate (section 1), there is evidence that
incentives for innovation from the patent system appear to apply only in a few
sectors (Harris 2014; PC 2013e). Where not warranted to incentivise innovation, the
patent system can impose costs on the community by impeding competition. For
example:

The accrual of ‘patent portfolios’ can potentially impede market entry by
preventing access to technologies. In some cases, firms that accrue patents
conduct no business other than asserting their patents against other firms —
effectively ‘taxing’ other firms’ innovations via court cases. These strategies
decrease the ability of other firms to innovate and compete.

In areas of ‘cumulative innovation’, where innovation requires access to multiple
patents, there are higher costs to innovate because of the need to purchase those
patents. There can also be prohibitive transaction costs when negotiating access
with multiple holders. The need to access multiple patents can lead to ‘hold out’,
whereby the owner of a patent holds out for a better deal from a potential
innovator, which can also serve to discourage innovation.
Reforms beyond the competition law
Removing unwarranted regulations that impede competition
There is a significant body of evidence showing that the removal of regulations that
directly impede competition can improve economic efficiency by increasing
consumer choice, lowering prices, and opening up new business, employment and
occupational opportunities (PC 2005b). There is also scope to increase the benefits
of competition by removing measures that impede competition indirectly. These
measures include regulations that restrict firms’ abilities to set prices, or subsidies
that favour particular firms (or types of firms, such as small businesses).
Despite the progress made under NCP in reducing regulatory impediments to
competition, there are many more areas of potential reform. These include (but are
not limited to):

pharmacy ownership restrictions

limits on retail trading hours and on how close to each other similar businesses
can set up (planning and zoning rules)
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
coastal shipping protection (cabotage arrangements)1

aspects of international aviation (ownership rules)2

some rail freight services

some foreign investment rules (restrictions on foreign ownership)

some restrictions on professions, such as limits on entry

restrictions on water trading from rural to urban areas

taxi licensing quotas

regulations and policies affecting the financial services sector3

trade restrictions and antidumping arrangements

restrictions on parallel imports of books.
The Commission has examined many of these competition issues in past studies and
inquiries (table 1).
There is a case for conducting a further round of reviews that target the more
significant restrictions on competition that avoided, or were not adequately
subjected to, rigorous and independent scrutiny in the NCP reviews, or where the
economic environment has significantly changed.
1 On 8 April 2014, the Deputy Prime Minister and Minister for Infrastructure and Regional
Development announced the release of an options paper on approaches to regulating coastal
shipping in Australia for stakeholder comment.
2 The Commission notes that Australia has obligations relating to international aviation that may
be outside of the scope of competition policy reform in Australia.
3 On 20 December 2013, the Commonwealth Treasurer announced the final terms of reference for
the Financial System Inquiry, headed by David Murray, which will examine options that
promote a competitive and stable financial system that contributes to Australia’s productivity.
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Table 1
Area
Past Commission studies addressing competition issues
Previous recommendations and findingsa
Pharmacies There has been a failure to act on recommendations by a national independent
review of pharmacy to relax ownership and other anticompetitive restrictions.
Priority should be given to conducting a second round review of pharmacy
regulation, covering all potential restrictions on competition in the sector
(PC 2005b).
Retail
Retail trading hours should be fully deregulated in all states.
trading
Governments should (where responsible) broaden business zoning and
significantly reduce prescriptive planning requirements to allow the location of all
retail formats in existing business zones to ensure that competition is not
needlessly restricted (PC 2011d).b
Coastal
The Government should conduct a broad review of impediments to efficiency and
shipping
competition in coastal shipping (including cabotage arrangements) (PC 2005b).c
The Australian Government should proceed with the foreshadowed review of
coastal shipping regulation (including cabotage) as a matter of priority. The
objective of the review should be to achieve the most efficient coastal shipping
services feasible for Australia (PC 2014c).
Water trade Policy bans on urban water supply augmentation from certain sources, such as
rural–urban trade, should be removed (PC 2011a).
Parallel
Parallel import restrictions for books should be repealed and three years notice
imports of should be given to facilitate industry adjustment.
books
The Government should review the current subsidies aimed at encouraging
Australian writing and publishing, with a view to better targeting cultural
externalities (PC 2009).
AntiThe imposition and continuation of antidumping and countervailing measures
dumping
should be subject to a ‘bounded’ public interest test, to take account of wider
impacts and prevent the imposition of measures that would be disproportionately
costly (PC 2010a).
a The list of recommendations is not exhaustive. b In June 2014, the Commission (2014a) identified that,
while there had been some relaxation of restrictions, four jurisdictions were yet to fully deregulate their trading
hours. There were some signs of partial progress on planning and zoning in some jurisdictions with Victoria
leading the way. c Coastal shipping protections were strengthened in 2012 with additional restrictions put on
foreign vessels operating between Australian ports.
Further reforms of government businesses
The NCP process supported reform of the governance and structure of government
businesses to make them more commercially focused and to open them to
competitive pressures. Structural separation has enabled competition to emerge in
contestable segments of utility supply chains (for example, retail electricity markets).
As identified below, the Commission’s recent work examining the performance of
government-owned utility businesses suggests there is scope to undertake further
reforms to improve service quality and reduce service costs.
The scope for particular competition reforms will vary across sectors and regions,
and competition policy at the national level needs to be sufficiently flexible to
accommodate these differences. In the urban water sector, for example, the largest
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efficiency gains are likely to come initially from reforms relating to governance,
regulation, competitive procurement of supply, and pricing reforms (PC 2011a). In
the electricity sector, where there is greater private sector involvement and market
reform is more advanced, further privatisation of government-owned businesses
(such as state-owned network businesses) could result in efficiency gains
(PC 2013c) (box 7).
The Commission has previously noted that if state and territory governments elect
not to privatise electricity network businesses, they should refine the governance
arrangements of those businesses to create, as much as is possible, the same
incentives that exist for private businesses. Examples of measures that would
promote more efficient outcomes include removing objectives currently given to
network businesses that are non-commercial (or more appropriately allocated to
other agencies) and making it clear that the board is expected to deliver a dividend
payout and rate of return on the equity invested in the network business that would
be considered acceptable by a commercial investor (PC 2013c).
Competitive neutrality
Where businesses remain under government ownership, competitive neutrality
policy aims to promote efficient competition between public and private businesses.
The Commission operates the Australian Government Competitive Neutrality
Complaints Office (as provided for under its enabling Act), and through its
experience in that role has identified several areas in which competitive neutrality
policy could be improved, including:

a revision and clarification of a number of policy elements, such as clearer
guidelines on the application of competitive neutrality during the start-up stages
of new government business enterprises

a review by governments of their competitive neutrality policy statements

a commitment by the Heads of Treasuries to produce their annual competitive
neutrality matrix report within six months of the end of each financial year
(box 8).
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Box 7
Privatisation of government-owned utilities
Where the objective of reform is to achieve the most efficient management of assets,
privatisation of utilities will often be the preferred policy option.

For electricity network businesses, state-owned businesses, on average, have lower
productivity than their private peers (PC 2013c). State-owned enterprises are also
sometimes required to meet certain obligations — such as local content provisions
or appeasement of sectional interests — that are antithetical to the interests of the
consumers that they serve (PC 2013c, p. 270ff).

There is evidence that in some sectors, such as airports, privatisation has been
consistent with the objective of achieving more efficient investment (PC 2012b).

All major utilities are already subject to sophisticated regulatory regimes designed to
limit the misuse of market power. It is these regulations, not ownership that helps to
protect end users from exploitation of market power.

Privatised entities will generally have a greater incentive for good project selection
and efficient delivery of infrastructure than government-owned businesses as they
are subject to capital market disciplines (that is, they are exposed to the threat of
takeover or market assessment of funds manager performance) and generally do
not have a government guarantee (PC 2014b).
However, privatisation may need to be accompanied by complementary policies to
ensure that outcomes are efficient and that certain community goals are met. These
include:

Structural separation of potentially contestable elements from natural monopoly
network infrastructure (where justified by a comparison of costs and benefits).
Where structural separation is not pursued prior to privatisation, there is a risk that a
private provider will have an incentive to restrict access to network assets in order to
protect other parts of their business. It has been argued that structural separation of
Telstra would have led to a more competitive telecommunications industry
(Sims 2013).

The creation of a sound regulatory environment prior to privatisation, including third
party access arrangements. Any major ex post changes in regulation may pass
rents to the new owners (where economic regulation is subsequently weakened) or
impose economic losses on buyers. Moreover, the absence of credible
commitments by governments about key features of the future regulatory regime
raises uncertainty for buyers, affecting sale prices. In its inquiry into electricity
networks, the Commission argued that reforms to reliability standards and network
planning should be implemented quickly to avoid these problems.

Clearly-specified hardship policies and community service obligations, with the latter
most desirably met through direct budgetary measures.

A well-planned process for privatisation. There are many different pathways and
timetables for privatisation.
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Box 8
What should be done to improve competitive neutrality policy?
Competitive neutrality policy aims to promote efficient competition between public and
private businesses. It seeks to ensure that government businesses do not enjoy
competitive advantages over their competitors (actual or potential) simply by virtue of
their public sector ownership.
The purpose of the policy, which stemmed from the 1995 Competition Principles
Agreement, is to improve resource allocation. Policy requirements are set out in the
Competitive Neutrality Policy Statement of 1996. Since that time, the policy has not
been reviewed or updated.
The Productivity Commission, through the Australian Government Competitive
Neutrality Complaints Office, is responsible for handling complaints that businesses
owned by the Australian Government are not complying with competitive neutrality
policy. Through this role, the Commission has identified several areas in which
competitive neutrality policy could be improved to ensure better policy outcomes and
more transparent compliance.
 A revision and clarification of a number of policy elements, including:
– Clearer guidelines on the application of competitive neutrality during the start-up
stages of new government business enterprises that are or will be engaged in
significant business activities. This includes the extent to which competitive
neutrality provisions should be included in business models and in initial planning.
– A definition of the ‘longer term’ to which the policy applies. Of critical importance
to the application of the policy is that government businesses should earn a
commercial rate of return to justify the retention of assets in the business over
the longer term. However, this term is not defined, nor is there guidance on its
application to a start-up business.
– The obligation of government to respond to the findings of policy breaches and
recommendations. Currently there are no formal requirements and recent
investigation reports (NBN Co and PETNET) have not had official responses.
– Self-reporting requirements of government businesses or agencies conducting
business activities. The policy should require self-reporting in annual reports of
the steps taken to ensure compliance. This would both aid in the assessment of
compliance and also provide some transparency to private sector competitors
that the business is operating in line with government policy.
 A review by governments of their competitive neutrality policy statements to assess
whether they are relevant and reflective of contemporary practice, and whether
processes for handling competitive neutrality complaints are identifiable,
independent and accessible.
 A commitment by the Heads of Treasuries to produce their annual competitive
neutrality matrix report within six months of the end of each financial year.
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4
Expansion of competition policy in human services
There is considerable interest in Australia and in other countries about the degree to
which policies to increase competition should be employed in the human services
sector. The Competition Policy Review Issues Paper highlights the need to examine
the sector and the extent to which competition can promote the innovative, cost
efficient and responsive delivery of human services to the community.
The heightened interest is driven in part by the large and growing amount of
government expenditure in the sector, which suggests that even a small
improvement in efficiency would make a large difference in government outlays
and in the quantity and quality of services delivered for any given level of
expenditure.
The existence of market failures in many aspects of markets for human services
means that full competition will often not deliver efficient outcomes. For example,
the public good nature of a healthy population means that, if based solely on their
own preferences, individuals will tend to undervalue aspects of health care that
generate benefits to the community as a whole. And, as discussed in section 1,
inadequate information can mean that individuals will not always be able to make
rational decisions about what health care services, or which providers, best serve
their interests.
Further, while competition may deliver cost-effective outcomes, it does not
guarantee the achievement of non-efficiency objectives such as equity of access to
basic health services.
Governments have often pursued equity objectives in the human services sector
through income transfers to certain community groups as well as through more
direct involvement (PC 2005b). For example, key human services such as health
and education have been traditionally provided under ‘administered market
arrangements’ in which governments have a central role in determining what is
provided, how much is provided (through a specific budget allocation) and who
provides the service (public, private, and/or not for profit agencies).
A drawback of administered market arrangements is that they often fail to provide
strong incentives for service providers to improve their efficiency and to deliver the
levels and quality of service required by users. To provide stronger incentives for
efficient delivery of human services, governments have, at times, empowered
consumers through consumer directed care, opened areas of the sector to
competition by multiple suppliers and introduced ‘market-based instruments’ within
an administered framework.
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Use of market-based instruments in the human services sector
Many areas of the human services sector involve an element of competition. These
include private medical practice, services provided by allied and other health
practitioners (such as physiotherapists, dentists and optometrists), private hospitals,
private schools, non-TAFE registered training organisations and childcare.
More recently, market-based instruments have been introduced into a broader range
of human services that have been largely funded and/or delivered by governments.
These instruments help establish the basic conditions for competition to be
effective, such as consumer choice and control, adequate information to support
rational consumer choice, reduced barriers to entry by competing suppliers (while
maintaining quality and safety) and more transparent and value-based pricing.
Some market-based instruments focus on creating better incentives for providers to
improve their efficiency and to deliver the levels and quality of service required by
users. These instruments include:

‘yard-stick’ competition, which involves benchmarking performance against
other providers of the same service

performance-based funding (such as casemix or activity based funding for
hospitals, which aims to provide a financial incentive for service providers to
reduce their costs for specific procedures) (box 9)

competitive tendering and contracting out, including devolution of responsibility
for providing the entire service under ‘purchaser-provider’ arrangements (for
example, non-government agencies can compete for contracts to provide
employment services to the unemployed).
Other market-based instruments seek to improve efficiency by sending signals to
providers about the value that users place on the services concerned, or by sending
signals to users about the costs of providing the service and enabling them to weigh
up the costs (whether publicly funded or partly co-funded by users) against the
value they receive from those services. Examples of these instruments include:

giving users scope to choose the provider that offers services that best match the
users’ requirements (for example, allowing recipients of disability or aged care
services to choose their own provider) (box 10)

requiring users to meet at least part of the cost of the services they receive (for
example, co-payments for some health services, and fees for higher education
courses and childcare).
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Box 9
Activity based funding of public hospitals
Activity based funding (particularly for hospital services) benchmarks services
according to their complexity, and assigns an ‘efficient’ price for each service. Hospitals
benefit if they can deliver services for less than these prices, thus providing an
incentive to improve efficiency. Activity based funding for public hospitals has been
applied to acute admitted public patient services, non-admitted services and
emergency department services under the National Health Reform Agreement.
Some estimates suggest significant benefits from these reforms. For activity based
funding of public hospitals, the National Health and Hospitals Reform Commission
estimated that annual savings could be in the order of $400-$900 million for acute
public inpatient services and $170–$430 million for non-admitted public patient
services.
However, there are difficulties in setting ex ante efficient prices, including the challenge
each jurisdiction faces translating national prices into their own prices. This adds
complexity to the model and inhibits cross-jurisdiction comparisons (Howes and
Engele 2013). Howes and Engele consider that the gains from activity based funding
are uncertain, and are likely to be much less than the National Health and Hospitals
Reform Commission estimates suggest. With pure activity based funding, there is also
a risk of ‘cherry picking’, where hospitals attempt to select the lower cost patients,
leaving more complex and costly cases to other providers.
Source: PC (2013a).
Experience with market-based instruments in human services (and other sectors) in
Australia suggests that such mechanisms often require refinement over time to
promote improved outcomes. For example, initial attempts to apply market
mechanisms to the provision of subsidised employment services in the late 1990s
(through the Job Network purchaser-provider model) encountered several issues,
including that many disadvantaged job seekers received little assistance. This
limited assistance may have been in part due to deficiencies in the payment system
for providers, which gave them an incentive to ‘park’ difficult-to-place job seekers
(PC 2002). Since the introduction of Job Network, the Australian Government has
introduced a number of changes to improve the cost effectiveness of its
purchaser-provider model for employment services (now known as Job Services
Australia), including amendments to fee structures.
It is also important to consider the capabilities of government departments
responsible for stewardship of public service markets. For example, some
government agencies may need time to develop their capabilities to design and
steward systems that rely on independent service providers.
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Box 10
Enhancing consumer choice: disability and aged care services
Institutional and administrative settings in human services that limit consumer choice
and restrict supply can dampen approved service providers’ incentives for efficiency
and lead to poor outcomes for people using those services. In Australia, this problem
has been particularly evident in areas such as disability support and the provision of
aged care services.
The Commission’s review of Australia’s disability support services (2011c) proposed a
range of measures to improve service delivery. A key reform proposal was a consumer
choice approach aimed at empowering consumers by providing them with access to
relevant information on services and flexibility in determining what services they
received. Under the Commission’s proposed National Disability Insurance Scheme,
support packages would be tailored to an individual’s needs. People could:

choose their own provider(s)

ask an intermediary to assemble the best package on their behalf

cash out their funding allocation and direct the funding to areas of need (with
appropriate probity controls and support)

choose a combination of these options.
The rationales for a consumer choice approach were that people are able to determine
their own needs better than others can, it can increase pressures on suppliers to
perform, and people value choice in its own right and have an incentive to get the best
value for money.
The Commission’s Caring for Older Australian’s report (2011b) included several
measures to empower consumers of aged care services, including allowing older
Australians to:

access a simplified ‘gateway’ for easily understood information on service
availability, quality, price and entitlements to service subsidies

choose whether to receive care at home and choose their approved provider

choose whether to purchase additional services and higher quality accommodation.
The report also proposed removing restrictions on entry (other than to meet quality and
safety standards) by providers, to improve competition, efficiency and the delivery of
services sought by consumers. An additional pro-competitive reform proposal was to
require transparency of pricing for accommodation, personal services and care.
Other measures for increasing economic efficiency in the human services sector
Given the complex nature of the human services sector and the important social
objectives involved, a range of strategies is often required to deliver better outcomes
for the community. In many cases competition-related reforms (such as the use of
market-based instruments) will only be a small part of the overall policy package.
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Other reform measures that can play a role in achieving better community outcomes
include:

governance and administrative reforms (improving internal management
processes by clarifying responsibilities and desired outcomes)

workplace and other regulatory reforms (promoting more flexible workplace
arrangements to increase system responsiveness to client needs and to deliver
services by those most cost-effectively trained to do so — safely and at the
required quality standard)

better coordination (in sectors as large, diverse and multi-jurisdictional as health
and education, effective coordination between the different components of the
overall service is essential) (PC 2005b) (box 11).
A word of caution
Introducing further competition reforms in the human services sector warrants
particular caution for several reasons.
First, the adverse consequences of ‘getting it wrong’ in some human services can be
significant. It is therefore vital that reforms do not aim to simply lower costs
without due regard to any effect that they may have on other objectives, such as
ensuring equity of access, quality and safety (box 12).
In some cases, governments may choose to mitigate market failures or address
equity concerns associated with competition reform by introducing additional
measures (such as improving arrangements for monitoring service quality and
prices). However, it is important to recognise that these additional measures will
have costs as well as benefits, and that there is a need to ensure administrative and
compliance costs do not outweigh the anticipated efficiency, quality and other
benefits of introducing more competition.
Second, arrangements for funding and delivering human services such as health and
education are often highly complex, meaning that changes in one part of a system
will often have effects elsewhere. These knock-on effects can be difficult to predict
in advance. For example, government intervention at both federal and state/territory
level in health systems is pervasive, there can be multiple and sometimes conflicting
objectives, price signals are often muted, and consumers of health services face
difficulties in making well-founded choices. Professional norms and regulation
often play a role in treatment choices and the allocation of health care resources
(PC 2013a).
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Box 11
Examples of other reforms aimed at improving the efficiency
of the human services sector
Re-examining workforce demarcations
As noted in the Productivity Commission’s Health Workforce report (2005a), a
re-examination of the scopes of practice of particular professions and the appropriate
skills mix required for particular tasks, could yield productivity gains. For example,
ensuring that workers that are appropriately (but not overly) skilled to perform medical
tasks could free up valuable resources for use elsewhere in the health system.
There has been some reform of workforce demarcations, including under the auspices
of Health Workforce Australia, and there appears scope for more. As previously noted
by the Commission, the scope of practice change is an ongoing process that requires
continued analysis of appropriate roles in line with changes in models of care, training
and technology (PC 2013a).
Reducing regulatory impediments to labour mobility
Historically, multiple laws and regulatory regimes for health professions acted as an
impediment to the mobility of workers and imposed administrative costs.
Following a recommendation by the Commission, the national system of registration
and accreditation (which includes 14 health professions), replaced eight separate
regulatory systems, 65 pieces of legislation, 85 health practitioner registration boards
and 38 regulatory organisations with one nationally consistent law and one national
registration agency.
In 2012, the Commission estimated that, by improving the mobility of workers, this
reform should improve the productivity of the health sector and result in long-run
savings of around $160 million per year (PC 2012c).
Giving public providers greater autonomy
The Commission’s study into the vocational education and training (VET) workforce
(2011f) found that there had been a rising trend to harness market forces in the
allocation of VET services, with principles such as user pays and user choice
increasingly underpinning VET policy. The Commission suggested that, as the VET
sector becomes increasingly competitive, a move towards greater managerial
independence for public providers would give them the autonomy and flexibility they
need to respond.
The Commission (2011f) also noted that opening up of the VET sector had not been a
complete success, with some stakeholders raising concerns about quality assurance,
monitoring and enforcement (especially in the international student sector).
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Box 12
Competitive bidding for the supply of medical equipment in
the United States
In the United States there has been ongoing debate about whether a transition to
competitive bidding for durable medical equipment, prosthetics, orthotics, and supplies
(which includes hospital beds, wheelchairs, and oxygen equipment) could result in
reductions in service choice, access and quality. Some critics of the competitive
bidding program have argued that the program’s emphasis on price competition may
result in unsustainable price reductions, eroding supplier competition based on quality
service and equipment. Reduced competition in the quality of service and equipment, it
is argued, could result in vulnerable people experiencing medical complications,
increasing their use of hospital, emergency room, and physician care, and losing their
ability to live independently (Dobson et al. 2010). It has also been suggested that the
laws underpinning the competitive bidding program lack a clear methodology for
evaluating and monitoring the quality and safety of clinical care and services bundled
in with medical equipment (Goldstein 2014).
The agency responsible for administering the competitive bidding program has argued
that there was no evidence of negative health care consequences to beneficiaries as a
result of competitive bidding after the first year of implementation (CMS 2012).
There can also be incentives for cost-shifting between different parts of the broader
health and social welfare systems (in part due to different governments having
responsibility for different services). Accordingly, changing a policy to fix one
problem in the health system will often risk creating problems elsewhere (Carrera
and Laudicella 2014; PC 2013a).4
Third, there is still debate about the empirical evidence supporting competition in
specific areas of human services. For example, Jensen (2013) suggests that at least
40 to 60 per cent of schools in Australia face no or very limited competition of the
sort that will improve performance. Reasons given for this include that not enough
schools:

have competitors that are as high-performing

have room for new students

are affordable for enough families

are physically close enough to provide the kind of competition that increases
performance across systems.
4 For example, competition that delivers cost containment in one area might reduce the rent
available to providers to cross-subsidise more expensive patients and, in doing so, undermine
equity goals in providing care (Carrera and Laudicella 2014).
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Despite the inevitable uncertainty about the precise effects of reform, or the
transactions costs that accompany any reform program, these concerns should not
be used as reasons to preclude competition-related initiatives without first
undertaking proper analysis (PC 2005b).
Given the need to address the multitude of policy problems in the human services
sector — such as rising costs or inefficiencies in service delivery — careful
analysis, extensive consultation, and possibly controlled policy experimentation,
should all be pursued (consistent with the principles of good regulatory process
outlined in box 3).
A further important consideration is the choice of indicators for measuring the
benefits of reform. If productivity is mismeasured, say because partial or potentially
misleading indicators of productivity are used, there is a risk that policies based on
such measures will not generate genuine gains for the community. In particular,
worse outcomes could result from failing to consider quality and simply pursuing
increases in quantity (using the same resources).
For example, if a general practitioner’s productivity were judged solely on the
number of patients seen per day, the practitioner could improve ‘productivity’ by
reducing the average consulting time per patient. Such ‘drive-through’ servicing
could reduce health outcomes by risking a less than appropriate examination of
patients’ individual needs. An apparent productivity improvement may have led to
cost reductions (at least in the short term), but could worsen health outcomes and
overall productivity (PC 2013a)
Given the above discussion, policy options for reducing the costs and/or improving
the quality of human services need to be properly structured to deliver the desired
outcomes. While opening markets to more competition has proven to produce
efficiency gains, experience suggests caution needs to be exercised. Importantly,
there are several other reform measures that can play a role in achieving better
community outcomes including administrative, regulatory and workplace reforms.
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